As I mentioned in my post, Forecast for 2020, Property Technology will be a factor influencing the real estate market this year. One of the technological developments that have arisen in the past few years, is the iBuyer. How will iBuyers affect the future of the real estate market?
What is An iBuyer?
An iBuyer is essentially a tech platform or website that provides home sellers an opportunity to sell their home quickly for cash.
Who Are the Players?
All 5 of these players offer essentially the same service. Let’s look at the pros and cons of these services.
Property can be sold quickly with a closing in several weeks up to a month.
No Staging / Cleaning
As a seller, you will not be required to stage or clean your home. The iBuyer will make an offer on your home without any viewing but the offer will be subject to inspection.
Your property will not be on the market for weeks and you will not be inconvenienced with showings to prospective buyers.
Since you are dealing directly with the iBuyer, there are no real estate commissions to pay, although you will still be responsible for other standard closing costs.
In exchange for the convenient sale, you will be offered a price that is below fair market value. The offer will be 3-5% less than the seller might receive on the open market.
Less Personal Interaction
Because iBuyers are an internet-based platform, all communications are online. The only person you will ever see is the home inspector.
Not Available in All Markets
iBuyers are relatively new to the market place and as such their services are not available in all markets. At this point in time, their services are available in the top 15 to 20 markets in the USA.
Not All Homes Are Eligible
iBuyers are very selective in the types of properties they will purchase. For example, none of them will purchase properties that were built prior to 1960. In addition, they are only interested in homes that require little or no repairs or renovation.
Misleading Marketing Regarding Total Cost to Seller
Even though you do not pay any real estate commissions, the iBuyer will charge you a “convenience fee” which can be between 6 and 9% of the selling price.
Once the inspections are completed, the iBuyer may reduce the offer by an additional 1-1.5% to cover the cost of repairs. At the end of the process, you could see your proceeds from the sale reduced by 11-15% in costs.
How Do iBuyers Operate?
Let’s take a look at how iBuyers are structured and how they operate.
Access To Cheap Cash
Most iBuyers are either financed by Wall Street through stock offerings or through very low-interest rate loans. As such, they have access to significant amounts of cash to purchase properties.
The downside to this structure is that Wall Street demands significant returns on their investment. Not only that, but they expect those returns to grow annually. As such, iBuyers are under pressure to deliver the numbers.
Because of the size and structure of the iBuyers, they have very rigid rules. They avoid problem deals such as divorce situations, probate, and they refuse to deal with double escrows, so they will not do business with wholesalers.
iBuyers focus primarily on home sellers who are looking for convenience. They are not necessarily motivated sellers. This part of the market is estimated to be about 10% of the total annual home seller market. To attract those sellers, iBuyers spend millions of dollars on brand marketing which adds significant cost to their business.
Just like the small house flipper, the iBuyer wants to buy cheap, make the minor repairs quickly, and resell the property for a profit. The fees they charge covers the cost of managing their organization.
Will iBuyers End House Flipping for the Small Investor?
This is the question that most concerns the small investor. The simple answer to this question is, it depends on what type of investor you are.
Creative vs. Traditional Real Estate Investing
Another way of looking at creative vs traditional investing is creative investors are more interested in motivated sellers while traditional investing is all about price.
iBuyers are traditional real estate investors. In other words, they make an offer on a property, the offer is accepted, and they either pay cash or get a traditional first mortgage. If you are that type of investor, then iBuyers pose a serious competitive threat.
If you are a creative investor where you use creative financing tools such as seller financing or wholesaling then you have little to worry about. iBuyers are definitely not interested in that part of the market.
The Future for iBuyers
It is of interest to note that so far, iBuyers have not been profitable. For example, Redfin lost $0.08 per share in the latest reporting quarter. The other iBuyers have not fared much better.
It seems that the iBuyers have overpaid on average for the homes they have purchased. Inevitably, they will have to adjust their business model in order to earn a profit. The obvious solution would be to lower the prices they offer for homes. However, in the current market where the supply of homes for sale is declining, home sellers will be more reluctant to accept less than market value for their property.
iBuyers might begin to offer other services such as title services, appraisals, or even a standalone inspection service. Time will tell.
The Bottom Line
While iBuyers focus on the 10% of the market that is looking for convenience, there is little overlap with the 2% of the market of motivated sellers that flippers target. As a small house flipper, you do not have large overhead costs and as such you need a lesser gross profit to make your investments worthwhile. As such, you can offer a higher price than the iBuyer can.
Given the current environment of high prices and the low inventory of homes for sale, iBuyers do not have a significant advantage. Should the market take a turn downward, that could very well change. We will have to wait and see.
It is safe to say that iBuyers will carve out a share of the market but it will definitely not change it significantly. For home buyers, there will be little noticeable difference. When iBuyers are selling the properties they have purchased they cannot ask more than market value if they expect a reasonably quick sale.
If you are a home seller, it is a different story. If you value convenience, then an iBuyer might be right for you. However, are the additional costs that you will be paying worth that convenience? Only you can answer that question.